Internal Control Reporting and Audit Report Lags: Further Evidence

2012 ◽  
Vol 31 (3) ◽  
pp. 203-218 ◽  
Author(s):  
Vishal Munsif ◽  
K Raghunandan ◽  
Dasaratha V. Rama
Keyword(s):  
Internal Control ◽  
Significant Decline ◽  
Control Problems ◽  
Section 404 ◽  
Audit Report ◽  
Material Weaknesses ◽  
Significant Interest ◽  
Using Data ◽  
Jobs Act ◽  
The Impact

SUMMARY Internal control reporting continues to be of significant interest to regulators and legislators, as evidenced by the internal control-related requirements of the Dodd-Frank Act (2010) and the JOBS Act (2012) to exempt smaller firms from the requirements of Section 404. We extend prior research on the association between internal control weaknesses and audit report lag by (1) using data from 2008 and 2009, (2) comparing accelerated and non-accelerated filers, and (3) examining the impact of remediation of previously disclosed internal control problems. We find that (1) in 2008, the increase in audit report lag in the presence of material weaknesses in internal control is lower for non-accelerated filers as compared to accelerated filers, and (2) while the effect of a material internal control weakness on audit report lag is significantly lower in 2009 than in 2008 for accelerated filers, there is no such change for non-accelerated filers. We also find that for firms remediating previously disclosed internal control problems, there is a significant decline in audit report lag; yet, the remediating firms continue to have higher reporting lags than firms that had clean Section 404 opinions in both years. We also find that, at least with respect to the effect of internal control problems on audit report lag, the “small accelerated filers” (defined as those with market capitalization less than $250 million) are treated by the auditors as being (1) substantively similar to other accelerated filers, and (2) quite distinct from non-accelerated filers.

Early Warnings of Internal Control Problems: Additional Evidence

2012 ◽  
Vol 32 (2) ◽  
pp. 171-188 ◽  
Author(s):  
Vishal Munsif ◽  
K. Raghunandan ◽  
Dasaratha V. Rama
Keyword(s):  
Internal Control ◽  
Audit Committee ◽  
Fiscal Year ◽  
Section 404 ◽  
Time Period ◽  
Material Weaknesses ◽  
The Difference ◽  
Using Data ◽  
Section 302 ◽  
Early Warnings

SUMMARY: Hermanson and Ye (2009; hereafter, HY) find that in the initial year of SOX Section 404 implementation, only 27 percent of accelerated filer firms with an adverse Section 404(b) report had disclosed such material weaknesses (MWs) in internal control in Section 302 certifications in previous quarters of the same fiscal year. We extend HY by examining (1) a more recent time period (using data from fiscal years 2007 and 2008), and (2) both accelerated and non-accelerated filers. We find that the proportion of accelerated filers (with adverse Section 404 reports) that have early warnings (in Section 302 certifications in previous quarters of the same fiscal year) is less than 50 percent even in the fourth and fifth years of Section 404 reporting. We also find that, after controlling for other factors, non-accelerated filers were more likely to have early warnings than accelerated filers in 2008; however, the difference is not significant in 2007. Early warning is more likely for firms with (1) a higher number of MWs, (2) a new CFO, (3) more audit committee members, and (4) more frequent audit committee meetings.

The Persistence in the Association between Section 404 Material Weaknesses and Financial Reporting Quality

2013 ◽  
Vol 33 (1) ◽  
pp. 93-116 ◽  
Author(s):  
Emma-Riikka Myllymäki
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Reporting Quality ◽  
Financial Reporting Quality ◽  
Control Problems ◽  
Section 404 ◽  
Material Weakness ◽  
Sarbanes Oxley ◽  
Material Weaknesses ◽  
History Of

SUMMARY This study examines whether Sarbanes-Oxley (SOX) Section 404 material weakness (MW404) disclosures are predictive of future financial reporting quality. I find evidence that for companies with a history of MW404s, the likelihood of misstatements in financial information continues to be significantly higher for two years after the last MW404 report compared to companies without a history of reported MW404s. The magnitude of the effect decreases non-linearly with decreasing speed. The findings further imply that the reason for the misstatement incidences is the unacknowledged pervasiveness of control problems. In particular, it appears that in many cases, the future misstatements are unrelated to the MW types disclosed in the last MW404 report, suggesting that some MW types are unacknowledged and, hence, control problems are even more pervasive than what was identified. Overall, the findings of this study highlight the importance of discovering and disclosing material weaknesses in internal control over financial reporting.

The Influence of Auditor and Client Section 404 Processes on Remediation of Internal Control Deficiencies at All Levels of Severity

2013 ◽  
Vol 32 (4) ◽  
pp. 45-69 ◽  
Author(s):  
Lynford Graham ◽  
Jean C. Bedard
Keyword(s):  
Internal Control ◽  
Financial Risk ◽  
Balance Sheet ◽  
Section 404 ◽  
Level Control ◽  
Sarbanes Oxley ◽  
Material Weaknesses ◽  
Financial Misstatements ◽  
Internal Control Deficiencies ◽  
Using Data

SUMMARY This paper examines remediation of Sarbanes-Oxley Section 404 internal control deficiencies (ICDs) at all levels of severity, before the balance sheet date. While a number of studies investigate remediation of publicly disclosed material weaknesses (MWs), the activity we study takes place out of public view and occurs among companies with both clean and adverse Section 404 opinions. Using data provided by multiple auditing firms, we find that about one-fourth of detected ICDs are remediated before year-end, leaving many uncorrected. We model remediation activity with direct measures of company and auditor Section 404 processes not available to prior research. Model results show that companies' effective information technology integration and early start to control testing are positively associated with remediation. In contrast, remediation is negatively associated with discovery by auditors, discovery by substantive tests, and related financial misstatements. Following prior research on MWs, we also observe that ICD remediation is less likely for smaller companies with greater financial risk, and for certain entity-level control problems.

Observed effectiveness of the COSO 2013 framework

2019 ◽  
Vol 16 (1) ◽  
pp. 31-45
Author(s):  
Ifeoma Udeh
Keyword(s):  
Control Systems ◽  
Internal Control ◽  
Design Methodology ◽  
Control Process ◽  
Regression Analyses ◽  
Section 404 ◽  
Content Type ◽  
Sarbanes Oxley ◽  
Material Weaknesses ◽  
Practical Implications

Purpose This paper aims to examine the effectiveness of the Committee of Sponsoring Organization’s 2013 Framework, by investigating how the number of auditor-reported material weaknesses compares for Early-, Timely- and Late-adopters of the framework, and how the number of auditor-reported material weaknesses changed for Early- and Timely-adopters following their adoption of the framework. Design/methodology/approach The paper uses regression analyses based on a sample of US firms subject to Sarbanes-Oxley Act Section 404(b). Findings Timely-adopters of the 2013 Framework continued to exhibit fewer instances of auditor-reported material weaknesses than Late-adopters, even though they had a marginal increase in the number of auditor-reported material weaknesses, in the post-2013 Framework period. Practical implications The findings suggest that the effectiveness of the 2013 Framework may lie in the iterative nature of the internal control process, and as firms remedy deficiencies they or their auditors identify, they will continuously improve the effectiveness of their internal control systems. Originality/value Unlike existing literature, this paper uses data from the pre-2013 Framework, transition and post-2013 Framework periods to examine changes in the number of auditor-reported material weaknesses, thus differentiating between Early-, Timely- and Late-adopters of the 2013 Framework. It also shows the effect of adopting the 2013 Framework on the number of auditor-reported material weaknesses.

Internal Control Quality and Audit Pricing under the Sarbanes-Oxley Act

2008 ◽  
Vol 27 (1) ◽  
pp. 105-126 ◽  
Author(s):  
Rani Hoitash ◽  
Udi Hoitash ◽  
Jean C. Bedard
Keyword(s):  
Internal Control ◽  
Risk Adjustment ◽  
Initial Period ◽  
Audit Fees ◽  
Control Problems ◽  
Section 404 ◽  
Audit Pricing ◽  
Audit Risk ◽  
Sarbanes Oxley ◽  
Section 302

This paper extends prior research on audit risk adjustment by examining the association of audit pricing with problems in internal control over financial reporting, disclosed under Sections 404 and 302 of the Sarbanes-Oxley Act [SOX]. While studies of auditors' responses to internal control risk provide mixed evidence, it is important to re-examine this issue using data on specific client problems not available prior to SOX. As a baseline, we first establish a strong association of audit fees with internal control problems disclosed in the first year of implementation of Section 404, consistent with prior research (e.g., Raghunandan and Rama 2006). We then address two issues on which prior results are contradictory. In a broadly based sample of accelerated filers, we find that audit pricing for companies with internal control problems varies by problem severity, when severity is measured either as material weaknesses versus significant deficiencies, or by nature of the problem. Also, while audit fees increase during the 404 period, our tests show less relative risk adjustment under Section 404 than under Section 302 in the prior year. Further examining intertemporal effects, we find that companies disclosing internal control problems under Section 302 continue to pay higher fees the following year, even if no problems are disclosed under Section 404. Overall, our findings provide detailed insight into audit risk adjustment during the initial period of SOX implementation.

The Impact of SOX Section 404 Internal Control Quality Assessment on Audit Delay in the SOX Era

2006 ◽  
Vol 25 (2) ◽  
pp. 1-23 ◽  
Author(s):  
Michael L. Ettredge ◽  
Chan Li ◽  
Lili Sun
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Small Sample ◽  
Impact Factors ◽  
Section 404 ◽  
Material Weakness ◽  
Control Quality ◽  
Sarbanes Oxley ◽  
Specific Material ◽  
The Impact

This study analyzes the impact of internal control quality on audit delay following the implementation of the Sarbanes-Oxley Act (2002) (SOX). Unlike prior studies of audit delay that obtain information about internal control strength via surveys, or use fairly crude proxies for internal control quality, our study employs external auditor assessments of internal control over financial reporting (ICOFR) that are publicly disclosed in SEC 10-K filings under SOX Section 404. Thus, the empirical evidence provided in this study is both timely and reliable (i.e., not subject to small sample bias or weak proxies). Consistent with our expectation, we find that the presence of material weakness in ICOFR is associated with longer delays. The types of material weakness also matter. Compared to specific material weakness, general material weakness is associated with longer delays. Additional analyses indicate that companies with control problems in personnel, process and procedure, segregation of duties, and closing process experience longer delays. After controlling for other impact factors, this study also documents a significant increase in audit delay associated with the fulfillment of the SOX Section 404 ICOFR assessment requirement. This suggests that Section 404 assessments have made it more difficult for firms to comply with the SEC's desire to shorten 10-K filing deadlines. Our finding thus supports and helps explain the SEC's decisions in 2004 and 2005 to defer scheduled reductions in 10-K filing deadlines (from 75 days to 60 days) for large, accelerated filers.

Earnings Management of Firms Reporting Material Internal Control Weaknesses under Section 404 of the Sarbanes-Oxley Act

2008 ◽  
Vol 27 (2) ◽  
pp. 161-179 ◽  
Author(s):  
Kam C. Chan ◽  
Barbara Farrell ◽  
Picheng Lee
Keyword(s):  
Earnings Management ◽  
Internal Control ◽  
Internal Controls ◽  
Corporate Disclosure ◽  
Section 404 ◽  
Sarbanes Oxley ◽  
Material Weaknesses ◽  
Potential Benefits ◽  
Internal Control Weaknesses ◽  
Reported Earnings

SUMMARY: The main objectives of the Sarbanes-Oxley Act of 2002 are to improve the accuracy and reliability of corporate disclosure. Under Section 404 of the Sarbanes-Oxley Act, the external auditor has to report an assessment of the firm’s internal controls and attest to management’s assessment of the firm’s internal controls. Material weaknesses in internal controls must be disclosed in the auditor and management reports. The objective of this study is to examine if firms reporting material internal control weaknesses under Section 404 have more earnings management compared to other firms. The results provide mild evidence that there are more positive and absolute discretionary accruals for firms reporting material internal control weaknesses than for other firms. Since the findings of ineffective internal controls by auditors under Section 404 may cause firms to improve their internal controls, Section 404 has the potential benefits of reducing the opportunity of intentional and unintentional accounting errors and of improving the quality of reported earnings.

Corporate Governance and Internal Control over Financial Reporting: A Comparison of Regulatory Regimes

2009 ◽  
Vol 84 (3) ◽  
pp. 839-867 ◽  
Author(s):  
Udi Hoitash ◽  
Rani Hoitash ◽  
Jean C. Bedard
Keyword(s):  
Corporate Governance ◽  
Financial Reporting ◽  
Internal Control ◽  
Audit Committee ◽  
Section 404 ◽  
Sarbanes Oxley ◽  
Material Weaknesses ◽  
Financial Expertise ◽  
Financial Expert ◽  
Section 302

ABSTRACT: This study examines the association between corporate governance and disclosures of material weaknesses (MW) in internal control over financial reporting. We study this association using MW reported under Sarbanes-Oxley Sections 302 and 404, deriving data on audit committee financial expertise from automated parsing of member qualifications from their biographies. We find that a lower likelihood of disclosing Section 404 MW is associated with relatively more audit committee members having accounting and supervisory experience, as well as board strength. Further, the nature of MW varies with the type of experience. However, these associations are not detectable using Section 302 reports. We also find that MW disclosure is associated with designating a financial expert without accounting experience, or designating multiple financial experts. We conclude that board and audit committee characteristics are associated with internal control quality. However, this association is only observable under the more stringent requirements of Section 404.

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